'Short the euro', says the likely US envoy to Europe. Should you?

In an unusually candid interview, the economist and academic Ted Malloch this week delivered a withering attack on the future of the euro. He branded it “a currency that is not only in demise but that has a real problem, and could in fact collapse in the coming year or year and a half”.

His remarks, made to the BBC, were all the more arresting because he may become Donald Trump’s new ambassador to . . . Europe.

For investors it’s a further reminder that currency has become a major variable that in the past we generally overlooked.

The plunge in the pound last year (see graph, below) has been manifest in all of our Isas, pensions and other investments, mainly in the apparently positive boost of rising share values. This occurred as our big, multinational shareholdings were rated more highly in sterling thanks to their dollar earnings.

As we’ve said here before, once the overseas, dollar-earning giants are removed from the FTSE 100 index of blue chip stocks, the rally of recent months is a more limp affair.

You can also see this where stocks are listed in several markets: BP’s dollar-denominated shares in New York are up by 20pc over the past 12 months. Their sterling-denominated shares in London have gained 39pc.

All this is happening at a time when our taste as investors for overseas holdings has never been greater.

What would a slump in the euro mean?

Many professional fund managers – the people running our Isas and pensions and making decisions about where to invest our cash – are already factoring in some fairly gloomy outlooks for the euro.

At least two major European parties, France’s Front National, led by Marine le Pen, below, and Italy’s Five Star Movement, are calling for a referendum on continued membership of the currency club. Elections are looming in France, Germany and Italy.

Portfolio managers are responding by doing what their counterpart managers did in Britain: moving their focus towards European-quoted companies with dollar earnings.

Rob Burgeman, a director at wealth manager Brewin Dolphin, said: “We’ve seen managers shift towards businesses with overseas earnings as a way to protect investors from a weakening sterling, and something similar is happening in Europe with the euro.

"If businesses there derive earnings in dollars, and the euro falls out of bed against the dollar, you would expect those shares to rise when valued in euros.”

Other managers are protecting against the possibility of the euro falling in another way, Mr Burgeman said, by making increasing use of “hedges”. This is where instruments are used to insure the portfolio against currency movements. They are becoming more common.

Many mainstream funds investing in overseas stocks now have “hedged” units alongside the regular ones. You effectively buy the same underlying portfolio of investments, but with the hedged version you get protection if the portfolio currency falls against the pound.

These hedged funds work well for income seekers who need certainty of payments, for example, but they add costs to the fund – and you could also get your timing wrong.

“If you’d been in a hedged portfolio over the past year you would not have enjoyed the gains other investors have seen,” Mr Burgeman said.

Buying into hedged European funds whose underlying holdings are largely global businesses with dollar earnings today would be one modest way to heed Mr Malloch’s advice and “short” the euro. More simply, you could just get away from euro-denominated assets altogether, especially cash, in favour of the dollar or perhaps Swiss franc.

You could go further.

In its basic form, shorting involves borrowing in one currency and investing the money elsewhere. The hope is that, by the time you come to repay the debt, it’s worth far less, leaving you with a profit. A number of exchange-traded funds or online financial betting shops allow you to gamble in this way over short periods. Good luck.

Otherwise, British investors with globally invested pensions and other portfolios are largely stuck with the euro and the uncertainties it faces in the coming months and years.